Markets
Yesterday, a cautious risk-on bias initially supported a slight rebound in core yields. Tensions on Italy also eased, at least temporary. Later, risk on sentiment eased. This was at least partially due to less positive comments from president Trump as he questioned that the meeting with North Korean leader Kim Jong Un will take place on June 12. He was also less optimistic on the US-China trade talks compared to the headlines earlier yesterday. US equities reversed earlier gains and closed with a modest loss. US yields closed the session little changed. German yields rose up to 3.7 bp (10y) with the 30-y outperforming (-0.9 bp). Italian 10-y spreads over Germany narrowed about 10 bp and this move also supported other peripheral markets. Today, the eco calendar contains the US PMI’s and new home sales. Those data will probably only be of intraday significance. The Minutes of the May Fed meeting remain interesting. Markets will look how the debate on three rather than two additional rate hikes evolves. A slightly hawkish tilt possible. However, it’s not sure that this will be able to push US yields substantially higher if global risk sentiment turns less positive. In Europe, May PMI’s will be scrutinized after a disappointing Q1 performance. We don’t think that the decline in economic momentum should go much further. If so, the report might help to put a floor for EMU yields. The formation of the Italian government remains a wild card for EMU bond trading.
Yesterday, the dollar traded with a slightly negative bias, but losses were modest given the recent rally. EUR/USD extended the rebound off the 1.1720 support as risk sentiment was slightly positive and as tensions on Italy eased, at least temporary. However, the EUR/USD rebound soon ran into resistance. EUR/USD closed the day slightly lower at 1.1779. At the same time, the USD/JPY rebound also lost momentum (no further rise in US yields and mediocre equity performance). Today, global risk sentiment will probably set the tone for USD/JPY trading. The pair this morning drifted further south to the 110.50 area. We have the impression that the topside momentum is easing. The EMU PMI’s and the developments in Italy will be the main drivers for EUR/USD trading. The PMI’s shouldn’t be too negative. If there comes no additional high profile negative news from Italy, a break of the 1.1720 support might not be that easy short term, even as we have to admit that yesterday’s EUR/USD price action was not that convincing. Also keep an eye on EUR/JPY as it is nearing the 129.00/50 support area.
Yesterday’s, several BoE members including governor Carney testified before parliament. Carney defended the BoE communication ahead of the May rate decision. Policy makers were not too negative on the UK eco outlook despite a disappointing Q1 and kept the door open for gradual rate hikes over the BoE policy horizon. It didn’t help sterling much. Today, the UK price data (including CPI) and the CBI retail data will be published. Headline inflation is expected stable at 2.5% Y/Y. Core inflation is see at 2.2% from 2.3%. These data probably won’t be enough for investors to adapt BoE rate hike expectations at this stage. Brexit noise is also no help for sterling.
News Headlines
US President Donald Trump casts further doubt on the June 12 summit with North Korea’s Kim Jong Un, saying “it may not work out for June 12”. Earlier, North Korea also threatened to cancel the summit if the US continues to pressure it unilaterally to denuclearize.
Japanse manufacturing PMI (May) dropped from 53.8 to 52.5. The fall suggests Japan’s manufacturing sector is losing momentum, signaling the world’s third-largest economy may not be rebounding as expected after contracting in the first quarter.
Today’s eco calendar contains UK CPI and PMI-data for the EMU, France, Germany. Fed’s Kashkari is scheduled to speak. The Fed publishes Minutes of its previous meeting. Germany and the US tap the bond market
